Don’t march against banks — walk away from them

Commentary: Protesters are missing the point

BOSTON (MarketWatch) — Bring on the barricades! Protesters are coming to downtown Boston Friday. I’ve just received notice that up to 1,000 people are expected to “march” on Bank of America “to rally against Wall Street greed, predatory lending, and skyrocketing foreclosures.”

We’ve seen protests in New York and elsewhere. A family in California is barricading themselves in “their” home — presumably they mean the bank’s home — to prevent foreclosure.

Bah.

I hate to break it to the marchers, but Bank of America
BAC, +0.28%
CEO Brian Moynihan has bigger problems. His stock has halved since the start of the year. Wall Street greed? Maybe he could give these folks train tickets down to Greenwich, Conn., to march against the hedge funds shorting his stock.

“Down with greed! Down with speculators!”

Reuters

Protesters who occupied Wall Street are coming to Boston and other cities.

The other banks are under similar pressure. Citigroup’s
C, -0.65%
down more than 40%. So is the Vampire Squid
GS, -0.59%

Raw capitalism appears to be eating its own… which is sort of the point of it.

Meanwhile, I’m wondering if these marchers understand anything at all.

If you’re a homeowner thinking of joining these rallies across the country, here’s some free advice.

Don’t march. Walk!

That’s right: walk. As in: …away from the home.

Under U.S. law, many homeowners can get an amazing do-over.

They can walk away from their mortgage, send in the keys, and in most cases the lenders will have to eat the loss.

Heads you win, tails the bank loses.

“Losing” a home in which you have no equity is a meaningless loss. Your thinking is about as upside down as your mortgage.Walk away and rent.

In about half the U.S. states, mortgages are “nonrecourse.” That means the bank takes back the home, and that’s about it. If you owe the bank $500,000 on a condo now worth $100,000, the bank eats the loss. Non-recourse states include California and Arizona, major mortgage meltdown states.

In the states, mortgages are what I call semi-recourse. Technically, the banks can come after you for the shortfall. But in practical terms they usually don’t. The borrower rarely has any money left anyway. Getting a so-called deficiency judgment for the shortfall is costly and time-consuming. And you can discharge debts if need be through bankruptcy.

Record-low mortgages rates... a housing problem?

When that happens they can’t touch money in your 401(k) or your IRA, unless they can prove to a judge that you put the money there with deliberate intent to defraud them. They can’t touch any college money for your children that’s been in a 529 plan for two years (and in some cases not before then either). Often times life insurance is protected. The court will usually let you keep a small amount of cash, personal effects, a car and so on. And each state has other loopholes. Iowa protects the family shotgun: One Iowan man 10 years ago successfully kept $10,000 from his creditors by going out, the day before filing for bankruptcy, and spending the money on a valuable antique shotgun.

Many states also protect a family Bible. Hmmm. Gutenberg, anyone?

Doubtless the unscrupulous can imagine a few other ways to hide money from their lenders, too.

It’s pretty outrageous, when you think about. Homeowners get to borrow money to speculate on a house. If it rises in value, they get the profits. If it falls, which is what has happened, they can walk away. No other country I know of offers a deal like this.

But before we point our fingers too aggressively, let’s note that the Wall Street bankers behaved just as badly. Worse, really. They were the professionals in the mortgage deal. They knew full well there was a housing bubble. But they merrily wrote out these crazy loans (with other peoples’ money), and pocketed gigantic — obscene — bonuses.

You can ignore the false trail being laid by some people of the far right about Fannie Mae, “liberals” and the Community Reinvestment Act. The bankers wrote the loans of their own free will, with other people’s money, and knew what they were doing. They wanted the huge bonuses and stock-option windfalls.

At least the homeowners will end up giving back the houses. They are typically left with very little, or nothing, to their names.

The bankers and mortgage brokers won’t give back a nickel of their bonuses. Not one nickel. And they’re not driving away in a rusted Chevy with the TV strapped to the roof either. They made off with billions.

According to a study last year by Harvard’s Lucien Bebchuk and Holger Spamann and Tel Aviv University’s Alma Cohen, the head honchos just at Bear Stearns cashed out about $1.4 billion from bonuses and equity sales in the eight years before the bank collapsed. The honchos at Lehman Brothers cashed out about $1 billion.

Lehman CEO Richard “Dick” Fuld alone pocketed $62 million from cash performance bonuses and another $461 million – you read that right: $461 million — from stock sales before the ship sank. His total take exceeded half a billion. Amount he’s given back? Have a guess.

It’s as if the captain of the Titanic had refused to go down with his ship, and instead had commandeered the first lifeboat and rowed away with a case of champagne, a hamper of quail’s eggs and pate de foie gras, and the contents of the ship’s safe.

Fuld’s just one figure. Thousands of people got away with it. And not just as the banks. A mortgage broker I know tells me of his “disgust” at the behavior of many of his counterparts. He compares the industry to the world’s oldest profession — and it comes off second best.

In the circumstances, you’ll forgive me if I can’t get angry about homeowners defaulting.

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